Four delusions about future Welsh spending

The emergency budget in June was one of the most significant political and economic events for many years. The Chancellor made controversial changes to the tax system and the structure of welfare benefits all which will impact on Wales as part of the UK. Also announced were huge cuts in public expenditure, over a four year period, which will average some 25 per cent across government departments (excepting health and overseas aid).

As yet, we know little detail about where the cuts will fall. We should have a clearer idea following the Chancellor’s Comprehensive Spending Review on 20 October. However, it is reasonable to assume that the block grant payable to the National Assembly will also reduce in line with UK government departments. It will not be the full 25 per cent since the Westminster Government is ringfencing the English health budget, with a knock on consequence for the Barnett formula which decides the size of the Welsh block grant. The overall cuts for Wales should therefore be somewhat lower, perhaps in the region of a total of 17-19 per cent cumulatively over four years.

Even so, the situation is totally unprecedented in peacetime and is greater than the spending cuts imposed by the IMF in 1976 or implemented by the Thatcher government in the 1980s. The vast majority of politicians, civil servants and public sector managers in Wales have pursued their careers in an environment of continuous growth in funding where the term ‘cuts’ was usually used to mean cuts in growth. This has now changed and public services in Wales now face real terms cuts in funding over a period of years.

Although the current concerns about public finances derive largely from the economic recession, their impact will be dwarfed, domestically and internationally, by a range of other longer term factors including:

• Demography – The population of Wales and the UK is getting older although the rate of ageing in Wales is less than that for the UK as a whole. Nevertheless, the impact of this aging population on issues like health care, social care and pensions is huge. Last year the Economist highlighted projections suggesting that the costs of the recent financial crisis will be dwarfed by the long term costs of ageing populations.
• Energy – Put crudely, energy is running out. As a consequence, energy costs will continue to rise and there are also concerns that shortfall in supply may lead to disruptions sometime in the period 2012-2015. Energy costs of public services may rise disproportionately compared to other costs and ahead of funding growth. Also public investment in new energy sources may squeeze out other public services investment.
• Environment – The key international environmental issue concerns carbon emissions and public services will have to make their own contribution towards the achievement of carbon reductions. The large scale public investment needed to achieve the targets may squeeze out alternative public services investment
• Economic performance – It is commonplace to assume that after recession the UK economy will bounce back to pre-recessionary growth levels. Early indications are that this may be difficult to achieve and UK economic growth may remain sluggish in the medium term at least. The structure of the Welsh economy is such that Welsh economic growth may lag behind even the limited growth in the rest of the UK. Such low levels of economic growth will limit any growth in resources for public services.

There is a need for a wide-ranging debate in Wales about the future of public services and the impact of the funding cuts. We start from a position that Wales is a country where public services are of huge importance because of the high demand for certain services (for example, the elderly and poor families) and the high levels of employment provided by the public sector. However, there are many delusions about what the future might hold including the following.

Delusion Number 1: The cuts won’t really happen There is evidence that a significant proportion of the public does not believe the cuts will take place and there may also be a proportion of those working in the public sector who think the same. While it is possible and desirable that the magnitude of the cuts will be scaled back or slowed down because of broader economic concerns, there are bound to be significant cuts in public expenditure in Wales over the next few years and this would have been the case whichever party had won the general election.

Delusion Number 2: It’s just a short term problem If we just regard the current fiscal crisis as one which will simply ‘go away’ in a few years with a return to ‘business as usual’ involving ongoing real terms increases in public expenditure each year then we are deluding ourselves. It should be obvious that the factors mentioned above which drive the demand for public expenditure will continue into the foreseeable future while sources of public funding will be hard to come by because of limited economic growth.

Delusion Number 3: We can do it  through ‘efficiency savings’ This, of course, begs the question as to why if there were efficiency savings to be made they hadn’t been realised before the current funding crisis. It is delusional to believe that cuts in funding of the magnitude required can be easily obtained just by ‘efficiency savings’. Although there may well be scope for some savings to be made the magnitude of the savings required, the short timescales involved and the barriers to change in the public sector make this exceedingly difficult to achieve.

Delusion Number 4: We can continue in broadly the same way The current crisis might best be seen as a watershed in Welsh social and economic history and suggests that we cannot continue as we are unchanged.

If we accept this last point then it will require substantial and radical thought about the future of public services in Wales. Among the issues we will need to consider are:

• Balance of responsibilities – It is unlikely that government can continue to provide the same range of services. Thus consideration needs to be given to the balance between what services an individual obtains privately and what is provided by the state, between individual and collective responsibility.

• Funding – Can the current range of public services in Wales coupled with increasing demands mean they can continue to be funded almost entirely from the proceeds of taxation? The demands for resources for services are likely to grow at a faster rate than the tax revenues available. Alternative revenue sources will be needed. For example, while the formation of the NHS was a great moment in Welsh and UK social history, the NHS was founded at a time prior to multiple joint replacements, organ transplants, expensive cancer drugs, genetic therapies, complex diagnostic procedures and so on. It seems likely that some form of health insurance model may be more appropriate for the future.

• Organisation – The organisation of public services in Wales has major weaknesses including the small size of Welsh local authorities, the lack of co-terminosity between the various public bodies in Wales and the limited success of multi-agency partnership arrangements in coordinating the delivery of services. One way of resolving these problems could be the creation of a smaller number of larger local authorities which would also have direct responsibility for the management of health services.

• Service delivery – There needs to be a radical shake up in the way in which public services are delivered. The outsourcing and private/third sector provision of publicly funded services should be considered on its merits and not on the basis of vested interests. Similarly, policies developed in England should be judged on their merits and not on ideology. Finally, there is a need to reduce the various restrictive practices which inhibit productivity improvements in Welsh public services